Understanding insurance bad faith and other important issues

In general, insurance companies owe their policyholders the duties to defend and to indemnify, meaning the obligation to provide a legal defense against claims filed by third parties that fall within the scope of the policy and the obligation to make payments to their customers for valid claims, respectively.

Failure to follow fulfill either of these duties is, of course, grounds for what is known as an insurance bad faith lawsuit.

Specifically, an aggrieved policyholder may bring what is known as either a first-party claim or a third-party claim:

First-party claims: These sorts of claims, brought by policyholders against their insurance company, accuse it of failing to settle their claim in good faith (i.e., fairly and honestly). Allegations typically include payment delays without justification, underpayments of losses and improper denial of coverage.

Third–party claims: These sorts of claims, also brought by policyholder against their insurance company, accuse it of failing to settle a claim brought by a third party within policy limits in good faith. Here, the lawsuits claim that this failure to settle the claims exposed the policyholder to liability in excess of their coverage.

While the idea of taking on an insurance company for its failure to live up to the promises made in its policy in exchange for the payment of premiums sounds like a daunting and perhaps even unlikely prospect, the reality is that many people do exactly this.

One question that people understandably have about pursing a bad faith lawsuit against an insurance company, however, is whether any recovery realized through the litigation will be subject to federal taxes. Like many legal scenarios, the answer is that it depends.

We’ll continue this discussion in a future post …

If you believe that an insurance company has failed to meet its obligations to you, consider speaking with an experienced legal professional to learn more about your options.